10.2.6 Global Agreements

The difficulty of achieving a global agreement on climate change underlined
in the previous sections depends on four main factors:

The heterogeneity of countries with respect to the causes of climate
change, the impacts, and the mitigation and adaptation costs. This factor
mainly influences the profitability of the decision to sign a climate agreement.
Some countries may lose when signing the agreement, even when environmental
benefits are fully accounted for. As shown by Chander and Tulkens (1995, 1997),
there always exists a system of economic and technological transfers that
may make all countries gain. But this again raises the equity problem and
the related burden-sharing issue. Equity may have a large impact on the existence
and size of a climate coalition. As previously argued, and as argued by many
policymakers and scientists, the way in which the burden of controlling emissions
is shared across countries crucially affects a countrys decision to
join a coalition. On the one hand, if the burden is not equitably shared,
some countries may not find it profitable to sign the agreement. Profitability
depends on two main factors: (1) the distribution of costs within the coalition
and (2) the size of the coalition. It is possible that there exists a minimum
size of the coalition above which it becomes profitable. And these two factors
are strictly interdependent. On the other hand, equity also affects free-riding
incentives. As in Section 10.2.5, in some cases it may
be reasonable for some countries to transfer resources to other countries
to induce them to join the coalition on which they would otherwise free-ride.
In this case, the final outcome is not equitablefree-riders would gain
more than countries in the starting coalitionbut it may be environmentally
and economically efficient.

The strong incentives to free-ride on the global agreement and the lack
of related sanctions. When all countries agree to control emissions, a
defecting country achieves the whole benefit, because its incidence on global
emission is marginal (with a few exceptions) and pays no cost. Hence, a defection
with respect to a large coalition is the optimal strategy if there are no
sanctions. However, credible sanctions are difficult to design (Barrett, 1994).
Emissions themselves are hardly a credible sanction, because countries are
unlikely to sustain self-damaging policies. Moreover, in this case, asymmetries
play a double role: some countries may not gain from signing the environmental
agreement, whereas some countries, even when gaining from environmental co-operation,
may lose from carrying out the economic sanctions (Barrett, 1997c; Schmidt,
1997).

The absence of environmental leadership. The process of achieving
a global agreement can be a sequential one (Carraro and Siniscalco, 1993),
in which case a group of countries take the leadership, start to reduce and/or
control emissions and implement strategies such as to induce other countries
to follow17.
The presence of low-cost climate policies and equitable burden-sharing (Schmidt,
1997) are again important elements for the formation of an initial profitable
coalition. As said, our definition of profitability accounts for the environmental
benefits of emission control. Hence, benefits should be increased by increasing
the number of countries that control emissions, but abatement costs should
be minimized by exploiting all possible opportunities (including emissions
trading). This is a prerequisite to achieving a strong leader coalition that
can exert its leadership through the design of better negotiation rules, the
implementation of transfer mechanisms, and the credibility of international-issue
linkages. A preliminary model of the effects of leadership is given in Jacoby
et al. (1998), who show how and when developing countries may join a leader
coalition formed by Annex I countries.

The focus on a single international climate agreement. As explained
in Section 10.3.1, if countries may join different
coalitions, which means that several agreements can be signed by groups of
countries in the same way as countries form trade blocs, then the likelihood
that all or almost all countries set emission reduction targets increases
(Yi and Shin, 1994; Bloch, 1997; Carraro, 1997, 1998). The outcome of negotiations
in which more agreements can be signed is usually a situation with several
small environmental blocs (Carraro and Moriconi, 1998), but this can be considered
a step in the right direction. If all or almost all countries set emission
reduction targets within their own bloc (e.g., regional environmental agreements
are signed), then, in a subsequent phase, negotiations among blocs may lead
to more ambitious emission reductions.

Despite the warning that global agreements may be difficult to reach, many
articles analyze the costs of agreements in which all countries participate,
in one form or another (see, e.g., Capros, 1998, Ellerman et al., 1998; Manne
and Richels, 1998; Shackleton, 1998; Bosello and Roson, 1999; Nordhaus and Boyer,
1999). The weakest form, discussed in Section 10.2.4,
is that in which a few countries commit to emission reductions, but all accept
trade emissions in a single international market. The strongest form is that
in which a central planner is assumed to set optimal emissions levels for all
world countries. This optimal solution is often proposed as a benchmark for
actual negotiations and was often analyzed before Kyoto (see the collection
of papers in Carraro (1999d)).

More interesting is the attempt made by Peck and Teisberg (1999) to model the
negotiations between developed and developing countries to achieve a global
agreement. This paper shows the potential for the achievement of co-operation
to be achievedthe Pareto frontier is small, but not emptybut does
not analyse the incentives to actually sign the agreement. However, the paper
suggests a research direction that at least helps to identify the optimal emission
reductions that are profitable for all negotiating countries.

The conclusions that can be derived from this type of empirical analyses are
similar to those already mentioned for partial agreements. In the scenario in
which baseline emissions are lower, it is easier to achieve a global agreement
because lower emissions reductions are necessary (Barrett, 1997b) and consequently
abatement costs are lower. Optimal emissions targets are such that they equalize
marginal abatement costs. This optimal, cost-minimizing solution can also be
achieved through an unconstrained emissions-trading system (Chander et al.,
1999). Hence, either emissions targets are optimally set, or countries are allowed
to trade emissions for any given set of targets through which a global consensus
can be achieved. Of course, these two options have different impacts on equity.
As shown by Bosello and Roson (1999), starting from the Kyoto targets, international
unconstrained emissions trading among all countries achieves optimality, but
reduces equity.